EARNOUT AGREEMENT
Dated as of June 30, 2024
by and among
ARDENT HEALTHCARE ACQUISITION CORP.,
CARDINAL PEAK INDUSTRIES, INC.,
and
THE SHAREHOLDERS OF CARDINAL PEAK INDUSTRIES, INC.
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EARNOUT AGREEMENT
This EARNOUT AGREEMENT (this "Agreement") is made and entered into as of June 30, 2024 (the "Effective Date"), by and among:
(1) Ardent Healthcare Acquisition Corp., a Delaware corporation ("Purchaser"), with its registered address c/o National Registered Services, Inc., 1209 Orange Street, Wilmington, Delaware 19801 (Delaware Secretary of State File No. 7129384; EIN 93-2184720);
(2) Cardinal Peak Industries, Inc., a Delaware corporation ("Seller"), with its principal offices at 8400 Crescent Ridge Parkway, Suite 200, Nashville, Tennessee 37215 (Delaware Secretary of State File No. 5487231; EIN 82-3947561);
(3) The Shareholders of Cardinal Peak Industries, Inc. (collectively, the "Seller Shareholders"), consisting of the following:
(a) Dr. Randall J. Whitfield, an individual resident of the State of Tennessee, holding approximately fifty-two percent (52%) of the outstanding equity interests of Seller;
(b) Elaine Whitfield-Torres, an individual resident of the State of Tennessee, holding approximately eighteen percent (18%) of the outstanding equity interests of Seller;
(c) Ridgeline Growth Equity Fund II LP, a Delaware limited partnership, holding approximately twenty-two percent (22%) of the outstanding equity interests of Seller; and
(d) Certain other management shareholders of Seller, holding in the aggregate approximately eight percent (8%) of the outstanding equity interests of Seller, each of whom is identified on, and has executed, the signature pages attached hereto (collectively, the "Management Shareholders").
Purchaser, Seller, and the Seller Shareholders are collectively referred to herein as the "Parties" and individually as a "Party."
RECITALS
WHEREAS, Purchaser and Seller are parties to that certain Asset Purchase Agreement dated as of April 2, 2024 (as amended, modified, or supplemented from time to time, the "APA"), pursuant to which Purchaser agreed to acquire, and Seller agreed to sell, transfer, convey, and deliver to Purchaser, substantially all of the assets of Seller relating to its outpatient rehabilitation and behavioral health operations for a base purchase price of Six Hundred Twenty Million Dollars ($620,000,000), subject to customary adjustments as set forth in the APA;
WHEREAS, the transactions contemplated by the APA were consummated on June 30, 2024 (the "Closing Date"), and, as of such date, Purchaser has acquired substantially all of the assets of the Acquired Business (as defined herein);
WHEREAS, Purchaser is a wholly-owned subsidiary of Ardent Capital Partners III LP, a Delaware limited partnership managed by its general partner, Ardent Capital Management LLC, a Delaware limited liability company;
WHEREAS, the APA contemplates the payment of contingent consideration to the Seller Shareholders in the form of earnout payments based on the post-closing financial performance of the Acquired Business, as further set forth herein;
WHEREAS, the Parties desire to set forth in this Agreement the terms, conditions, methodology, and procedures governing the calculation, verification, and payment of such earnout consideration, including the Adjusted EBITDA targets that must be achieved, the mechanics for determining whether such targets have been met, the allocation of earnout payments among the Seller Shareholders, and the resolution of disputes arising in connection therewith;
WHEREAS, this Agreement is being executed and delivered simultaneously with the closing of the transactions contemplated by the APA and constitutes an integral part of the overall transaction agreed upon by the Parties; and
WHEREAS, capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the APA.
NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:
ARTICLE I — DEFINITIONS
As used in this Agreement, the following terms shall have the meanings set forth below. Capitalized terms used in this Agreement and not defined in this Article I shall have the meanings ascribed to them elsewhere in this Agreement or, if not defined herein, in the APA.
"Acquired Business" means the business and operations acquired by Purchaser from Seller pursuant to the APA, including all thirty-seven (37) outpatient rehabilitation and behavioral health facilities located across the following states: Tennessee (fourteen (14) facilities), Georgia (eight (8) facilities), North Carolina (five (5) facilities), South Carolina (four (4) facilities), Alabama (three (3) facilities), Virginia (two (2) facilities), and Kentucky (one (1) facility), together with all related assets, contracts, permits, licenses, intellectual property, accounts receivable, equipment, leasehold interests, employees, and operations transferred to Purchaser at the Closing Date pursuant to the APA.
"Adjusted EBITDA" means, for any Earnout Period, the net income (or net loss) of the Acquired Business for such period, determined in accordance with GAAP consistently applied, plus, without duplication, to the extent deducted or included in the calculation of such net income (or net loss):
(i) interest expense (including non-cash interest, amortization of deferred financing costs, and any premium or penalties on the early repayment of indebtedness);
(ii) income tax expense (including federal, state, and local income taxes, whether current or deferred);
(iii) depreciation expense;
(iv) amortization expense (including amortization of intangible assets and goodwill, if applicable);
plus or minus, as applicable, the following adjustments:
(a) non-recurring transaction costs directly related to the closing of the transactions contemplated by the APA, including legal fees, accounting fees, investment banking fees, and other advisor fees incurred in connection with the negotiation, execution, and consummation of the APA and the transactions contemplated thereby;
(b) non-recurring integration costs incurred by Purchaser during the first twelve (12) months following the Closing Date in connection with integrating the Acquired Business into Purchaser's or its affiliates' operations, provided that the aggregate amount of integration costs added back pursuant to this clause (b) shall not exceed Seven Million Five Hundred Thousand Dollars ($7,500,000) during the applicable Earnout Period;
(c) any management fees, monitoring fees, advisory fees, transaction fees, or similar fees or expenses charged by Ardent Capital Management LLC or any of its affiliates to the Acquired Business or allocated to the Acquired Business by Purchaser;
(d) any non-cash stock-based compensation expense, including the expense associated with any equity incentive plans, phantom equity plans, or similar arrangements implemented by Purchaser or its affiliates with respect to employees of the Acquired Business;
(e) extraordinary or non-recurring items, including (without limitation) (I) any expenses, losses, judgments, settlements, or other costs related to the litigation captioned Dawson v. Cardinal Peak Industries, Inc., Case No. 3:23-cv-01847 (M.D. Tenn.) (which is an excluded liability under the APA and shall not be included in the calculation of Adjusted EBITDA regardless of whether such costs are borne by the Acquired Business), (II) restructuring charges, (III) asset impairment charges, (IV) severance costs related to position eliminations outside the ordinary course of business, and (V) natural disaster or force majeure losses (net of any insurance recoveries received or accrued); and
(f) losses or gains on the sale, transfer, or other disposition of assets of the Acquired Business outside the ordinary course of business, including any gain or loss on the sale of real property, equipment, or other capital assets not in the ordinary course.
For the avoidance of doubt, Adjusted EBITDA shall be calculated in a manner consistent with the methodology used to determine the last-twelve-months Adjusted EBITDA of the Acquired Business of Seventy-Four Million One Hundred Sixty Thousand Dollars ($74,160,000) for the fiscal year ended December 31, 2023, as set forth in Schedule 3.5(a) of the Disclosure Schedules to the APA, and in accordance with the illustrative calculation methodology set forth in Exhibit A attached hereto. In the event of a conflict between the Adjusted EBITDA definition set forth herein and the methodology set forth in Exhibit A, the definition set forth in this Article I shall control.
"APA" means that certain Asset Purchase Agreement dated as of April 2, 2024, by and between Purchaser and Seller, as the same may be amended, modified, or supplemented from time to time in accordance with its terms.
"Change of Control" means any of the following events:
(a) the sale, transfer, lease, exclusive license, or other disposition of all or substantially all of the assets of the Acquired Business or of Purchaser to any person or entity that is not an affiliate of Ardent Capital Partners III LP;
(b) any merger, consolidation, recapitalization, business combination, or similar transaction involving Purchaser in which the equity holders of Ardent Capital Partners III LP immediately prior to such transaction hold less than fifty percent (50%) of the voting equity interests in the surviving or resulting entity immediately following such transaction;
(c) the acquisition by any person or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended), other than Ardent Capital Partners III LP or its affiliates, of direct or indirect beneficial ownership of more than fifty percent (50%) of the outstanding equity interests of Purchaser; or
(d) any other analogous transaction, whether effected in a single transaction or a series of related transactions, that results in a fundamental change in the ultimate control of the Acquired Business.
The term "Change of Control" as used in this Agreement shall be construed broadly and shall encompass any transaction or series of transactions that, in substance, results in the transfer of economic or governance control over the Acquired Business to persons or entities other than Ardent Capital Partners III LP or its affiliates, regardless of the form of such transaction.
"Closing Date" means June 30, 2024.
"Earnout Cap" means Forty-Five Million Dollars ($45,000,000) in the aggregate, representing the maximum aggregate amount of all Earnout Payments payable under this Agreement.
"Earnout Payment" means any payment made or required to be made to the Seller Shareholders pursuant to Article II or Article VI of this Agreement.
"Earnout Period 1" means the twelve (12)-month period commencing on July 1, 2024 and ending on June 30, 2025.
"Earnout Period 2" means the twelve (12)-month period commencing on July 1, 2025 and ending on June 30, 2026.
"Earnout Statement" means the written statement prepared by Purchaser setting forth its calculation of Adjusted EBITDA for the applicable Earnout Period, together with all supporting schedules and reconciliations, as more fully described in Article III of this Agreement.
"GAAP" means United States generally accepted accounting principles as in effect from time to time, applied on a basis consistent with the historical accounting policies, practices, and methods of the Acquired Business, including those reflected in the audited financial statements of the Acquired Business prepared by Linden Hayes & Co., P.C. for periods prior to the Closing Date. In the event of a change in GAAP that would affect the calculation of Adjusted EBITDA, such change shall not be given effect for purposes of this Agreement unless mutually agreed upon in writing by Purchaser and the Seller Representative.
"Independent Accounting Firm" means a nationally recognized independent accounting firm mutually agreed upon by Purchaser and the Seller Representative for purposes of resolving disputes under Article IV of this Agreement. If Purchaser and the Seller Representative are unable to agree on the identity of the Independent Accounting Firm within fifteen (15) days following the expiration of the Negotiation Period (as defined in Section 3.4), the Independent Accounting Firm shall be selected by the American Arbitration Association pursuant to its procedures for the appointment of neutral experts. Notwithstanding anything to the contrary, neither Ashford & Creighton LLP (Purchaser's accounting advisor) nor Linden Hayes & Co., P.C. (Seller's former independent auditor) shall serve as the Independent Accounting Firm, and no firm that has provided material professional services to either Purchaser or any Seller Shareholder during the two (2)-year period preceding the engagement shall be eligible to serve in such capacity without the written consent of both Purchaser and the Seller Representative.
"Negotiation Period" has the meaning set forth in Section 3.4.
"Notice of Objection" has the meaning set forth in Section 3.3.
"Purchaser" means Ardent Healthcare Acquisition Corp., a Delaware corporation.
"Review Period" has the meaning set forth in Section 3.3.
"Seller" means Cardinal Peak Industries, Inc., a Delaware corporation.
"Seller Representative" means Dr. Randall J. Whitfield, acting in his capacity as the representative of and with binding authority over all Seller Shareholders for all matters arising under this Agreement, as more fully described in Section 8.3.
"Seller Shareholders" means, collectively, Dr. Randall J. Whitfield (52%), Elaine Whitfield-Torres (18%), Ridgeline Growth Equity Fund II LP (22%), and the Management Shareholders (8% in the aggregate), in each case as holders of equity interests in Seller immediately prior to the Closing Date.
"Tranche 1 Earnout" means the earnout payment contemplated by Section 2.1(a) of this Agreement.
"Tranche 1 Threshold" has the meaning set forth in Section 2.1(a).
"Tranche 2 Earnout" means the earnout payment contemplated by Section 2.1(b) of this Agreement.
"Tranche 2 Threshold" has the meaning set forth in Section 2.1(b).
ARTICLE II — EARNOUT PAYMENTS
Section 2.1 — Earnout Consideration.
Subject to the terms and conditions of this Agreement, including the Earnout Cap set forth in Section 2.2 and the allocation provisions set forth in Section 2.3, Purchaser shall pay to the Seller Shareholders the following contingent earnout consideration:
(a) Tranche 1 Earnout.
(i) If the Adjusted EBITDA of the Acquired Business for Earnout Period 1 (the twelve (12)-month period ending June 30, 2025) equals or exceeds Eighty-Five Million Dollars ($85,000,000), Purchaser shall pay to the Seller Shareholders the maximum Tranche 1 Earnout in an amount equal to Twenty-Two Million Five Hundred Thousand Dollars ($22,500,000).
(ii) If the Adjusted EBITDA of the Acquired Business for Earnout Period 1 exceeds Eighty Million Dollars ($80,000,000) (the "Tranche 1 Threshold") but is less than Eighty-Five Million Dollars ($85,000,000), the Tranche 1 Earnout shall be calculated on a linear interpolation basis at a rate of Four Dollars and Fifty Cents ($4.50) for each One Dollar ($1.00) of Adjusted EBITDA in excess of the Tranche 1 Threshold. For purposes of clarity, this rate is derived by dividing the maximum Tranche 1 Earnout of $22,500,000 by the spread of $5,000,000 between the Tranche 1 Threshold ($80,000,000) and the maximum target ($85,000,000), yielding $4.50 per dollar.
(iii) If the Adjusted EBITDA of the Acquired Business for Earnout Period 1 is equal to or less than the Tranche 1 Threshold of Eighty Million Dollars ($80,000,000), no Tranche 1 Earnout shall be payable and the Tranche 1 Earnout shall be zero dollars ($0).
Illustrative Example: If the Adjusted EBITDA of the Acquired Business for Earnout Period 1 is Eighty-Two Million Dollars ($82,000,000), the Tranche 1 Earnout would be calculated as follows: ($82,000,000 − $80,000,000) × $4.50 = $2,000,000 × $4.50 = $9,000,000. Accordingly, the Tranche 1 Earnout payable to the Seller Shareholders in such illustrative scenario would be Nine Million Dollars ($9,000,000).
(b) Tranche 2 Earnout.
(i) If the Adjusted EBITDA of the Acquired Business for Earnout Period 2 (the twelve (12)-month period ending June 30, 2026) equals or exceeds Ninety-Five Million Dollars ($95,000,000), Purchaser shall pay to the Seller Shareholders the maximum Tranche 2 Earnout in an amount equal to Twenty-Two Million Five Hundred Thousand Dollars ($22,500,000).
(ii) If the Adjusted EBITDA of the Acquired Business for Earnout Period 2 exceeds Ninety Million Dollars ($90,000,000) (the "Tranche 2 Threshold") but is less than Ninety-Five Million Dollars ($95,000,000), the Tranche 2 Earnout shall be calculated on a linear interpolation basis at a rate of Four Dollars and Fifty Cents ($4.50) for each One Dollar ($1.00) of Adjusted EBITDA in excess of the Tranche 2 Threshold. For purposes of clarity, this rate is derived by dividing the maximum Tranche 2 Earnout of $22,500,000 by the spread of $5,000,000 between the Tranche 2 Threshold ($90,000,000) and the maximum target ($95,000,000), yielding $4.50 per dollar.
(iii) If the Adjusted EBITDA of the Acquired Business for Earnout Period 2 is equal to or less than the Tranche 2 Threshold of Ninety Million Dollars ($90,000,000), no Tranche 2 Earnout shall be payable and the Tranche 2 Earnout shall be zero dollars ($0).
Illustrative Example: If the Adjusted EBITDA of the Acquired Business for Earnout Period 2 is Ninety-Three Million Five Hundred Thousand Dollars ($93,500,000), the Tranche 2 Earnout would be calculated as follows: ($93,500,000 − $90,000,000) × $4.50 = $3,500,000 × $4.50 = $15,750,000. Accordingly, the Tranche 2 Earnout payable to the Seller Shareholders in such illustrative scenario would be Fifteen Million Seven Hundred Fifty Thousand Dollars ($15,750,000).
Section 2.2 — Aggregate Earnout Cap.
The aggregate amount of all Earnout Payments made pursuant to this Agreement shall not under any circumstances exceed the Earnout Cap of Forty-Five Million Dollars ($45,000,000), consisting of up to Twenty-Two Million Five Hundred Thousand Dollars ($22,500,000) in respect of the Tranche 1 Earnout and up to Twenty-Two Million Five Hundred Thousand Dollars ($22,500,000) in respect of the Tranche 2 Earnout. The Tranche 1 Earnout and the Tranche 2 Earnout are independent of one another, and the failure to achieve the Tranche 1 Threshold during Earnout Period 1 shall not affect the eligibility for or calculation of the Tranche 2 Earnout during Earnout Period 2, nor shall the achievement of the Tranche 1 Earnout at any level affect the applicable thresholds or targets for the Tranche 2 Earnout.
Section 2.3 — Allocation Among Seller Shareholders.
Each Earnout Payment, if any, shall be allocated among the Seller Shareholders in proportion to their respective equity ownership percentages of Seller as of immediately prior to the Closing Date, as follows:
Each Seller Shareholder's share of any Earnout Payment shall be determined by multiplying the total Earnout Payment by the applicable Seller Shareholder's percentage set forth above. By way of illustration, if the Tranche 1 Earnout is determined to be $9,000,000, the allocation would be as follows: Dr. Randall J. Whitfield — $4,680,000; Elaine Whitfield-Torres — $1,620,000; Ridgeline Growth Equity Fund II LP — $1,980,000; Management Shareholders — $720,000 (allocated pro rata among the Management Shareholders). The Seller Representative shall determine the pro rata allocation among the Management Shareholders and shall communicate such allocation to Purchaser in writing.
Section 2.4 — Payment Timing and Mechanics.
(a) Each Earnout Payment, if any, shall be paid by Purchaser within fifteen (15) business days following the date on which the applicable Earnout Statement becomes final and binding on the Parties, whether by acceptance or deemed acceptance pursuant to Section 3.3, by mutual agreement of the Parties following resolution of a Notice of Objection pursuant to Section 3.4, or by determination of the Independent Accounting Firm pursuant to Article IV.
(b) All Earnout Payments shall be made by wire transfer of immediately available funds in United States dollars to the bank accounts designated by the Seller Representative in writing (in accordance with Exhibit C attached hereto) at least five (5) business days prior to the applicable payment date. Purchaser shall make separate wire transfers to each Seller Shareholder (or to such Seller Shareholder's designee) in accordance with the allocation percentages set forth in Section 2.3 and the wire instructions provided by the Seller Representative. Purchaser shall have no liability for any errors in wire transfer instructions provided by the Seller Representative.
(c) All Earnout Payments shall be treated by the Parties as additional purchase price for the acquired assets for all federal, state, and local income tax purposes, consistent with the asset purchase structure under the APA and in accordance with Section 1060 of the Internal Revenue Code of 1986, as amended. The Parties shall allocate any Earnout Payments among the acquired assets in a manner consistent with the allocation methodology set forth in Section 2.8 of the APA (or, if the APA does not contain a specific allocation schedule for contingent consideration, in accordance with an allocation to be mutually agreed upon by Purchaser and the Seller Representative within sixty (60) days following payment of the applicable Earnout Payment). Each Party shall file all tax returns and reports consistently with such allocation and shall not take any position inconsistent therewith in any tax proceeding, audit, or otherwise, unless required to do so pursuant to a final determination (within the meaning of Section 1313 of the Internal Revenue Code).
Section 2.5 — No Right of Setoff (with Exception).
(a) Except as expressly provided in Section 2.5(b), Purchaser shall not offset, reduce, withhold, or otherwise set off any Earnout Payment against any indemnification claim, adjustment, obligation, or other amount that Purchaser or any of its affiliates may allege is owed by Seller, the Seller Representative, or any Seller Shareholder under the APA, this Agreement, or any other agreement or instrument.
(b) Notwithstanding the foregoing, Purchaser shall have the right to offset any Earnout Payment by any amount that has been finally determined (by agreement of the Parties, by final and non-appealable judgment, or by binding arbitration) to be owed by Seller or any Seller Shareholder to Purchaser under the indemnification provisions of the APA (Article IX thereof), but only to the extent that such indemnification amount (i) exceeds the remaining balance of the escrow fund held by Commonwealth Trust & Escrow Company pursuant to that certain Escrow Agreement dated June 30, 2024 among Purchaser, Seller, and Commonwealth Trust & Escrow Company (the "Escrow Agreement"), or (ii) remains unsatisfied after the expiration or exhaustion of such escrow fund. For reference, the escrow fund established under the Escrow Agreement consists of Sixty-Two Million Dollars ($62,000,000) in cash, to be released in two tranches: (A) Thirty-One Million Dollars ($31,000,000) to be released on June 30, 2025, subject to any then-pending or unresolved indemnification claims, and (B) Thirty-One Million Dollars ($31,000,000) to be released on December 30, 2025, subject to any then-pending or unresolved indemnification claims. The right of setoff under this Section 2.5(b) shall be limited to amounts that have been finally determined and are not then subject to a bona fide dispute. Purchaser shall provide the Seller Representative with written notice of any proposed setoff at least ten (10) business days prior to the applicable Earnout Payment date, including a reasonably detailed description of the underlying indemnification claim, the amount of the proposed setoff, and the basis for Purchaser's assertion that such amount has been finally determined.
ARTICLE III — EARNOUT CALCULATION AND REVIEW
Section 3.1 — Preparation of Earnout Statement.
(a) Purchaser shall prepare and deliver to the Seller Representative a written Earnout Statement for each Earnout Period within ninety (90) days following the end of the applicable Earnout Period. Accordingly:
(i) The Earnout Statement for Earnout Period 1 shall be delivered to the Seller Representative no later than September 28, 2025; and
(ii) The Earnout Statement for Earnout Period 2 shall be delivered to the Seller Representative no later than September 28, 2026.
(b) Each Earnout Statement shall set forth in reasonable detail the calculation of Adjusted EBITDA for the applicable Earnout Period, including:
(i) a complete income statement for the Acquired Business for the applicable Earnout Period, prepared in accordance with GAAP;
(ii) a line-item reconciliation from GAAP net income (or net loss) to Adjusted EBITDA, with each adjustment category identified separately and supported by reasonable documentation;
(iii) supporting schedules and workpapers for each material adjustment, including a description of the nature and amount of each item; and
(iv) a statement of the Earnout Payment, if any, calculated in accordance with Section 2.1.
(c) The Earnout Statement shall be prepared in accordance with GAAP, applied on a basis consistent with the historical financial statements of the Acquired Business as audited by Linden Hayes & Co., P.C. for periods prior to the Closing Date, and consistent with the Adjusted EBITDA definition set forth in Article I and the methodology illustrated in Exhibit A hereto. The form of the Earnout Statement shall be substantially in the form set forth in Exhibit B attached hereto.
(d) The Earnout Statement shall be accompanied by a certification executed by the Chief Financial Officer of Purchaser (or, if Purchaser does not have a Chief Financial Officer, by the most senior financial officer of Purchaser or Ardent Capital Management LLC) certifying that the Earnout Statement has been prepared in good faith and in accordance with the terms of this Agreement and that the calculation of Adjusted EBITDA set forth therein is complete and accurate in all material respects.
Section 3.2 — Access to Books and Records.
(a) During each Earnout Period and for a period of sixty (60) days following the delivery of the applicable Earnout Statement, Purchaser shall provide the Seller Representative and the Seller Representative's accounting advisors (which advisors shall be subject to customary confidentiality obligations as set forth in Section 8.2) with reasonable access, during normal business hours and upon no less than five (5) business days' prior written notice, to the books, records, working papers, financial data, accounting systems, and supporting documentation of the Acquired Business as are reasonably necessary for the Seller Representative to review and verify the accuracy and completeness of the Earnout Statement, including:
(i) the general ledger and trial balance of the Acquired Business;
(ii) all journal entries and supporting documentation for material adjustments reflected in the Earnout Statement;
(iii) revenue and expense reports by facility location;
(iv) schedules of intercompany charges, allocations, and management fees, if any; and
(v) such other books, records, and information as the Seller Representative may reasonably request for purposes of verifying the Earnout Statement.
(b) Purchaser shall cooperate with the Seller Representative and its advisors in good faith and shall use commercially reasonable efforts to respond promptly to reasonable information requests during the Review Period. The Seller Representative and its advisors shall conduct their review in a manner that does not unreasonably interfere with the operations of the Acquired Business.
(c) The Seller Representative and its advisors shall keep all information obtained pursuant to this Section 3.2 strictly confidential in accordance with the provisions of Section 8.2 and shall not disclose such information to any person other than the Seller Shareholders and their respective legal and financial advisors (who shall be bound by comparable confidentiality obligations), except as required by applicable law or in connection with the dispute resolution procedures set forth in Article IV.
Section 3.3 — Review Period and Objections.
(a) The Seller Representative shall have forty-five (45) days following receipt of an Earnout Statement (the "Review Period") to review the Earnout Statement and to provide written notice to Purchaser of any objection to any item set forth in the Earnout Statement (a "Notice of Objection").
(b) Each Notice of Objection shall set forth in reasonable detail:
(i) each specific line item or adjustment in the Earnout Statement to which the Seller Representative objects;
(ii) the factual and accounting basis for each such objection, with reasonable specificity;
(iii) the Seller Representative's proposed adjustment to each disputed item, including the Seller Representative's calculation of the correct amount; and
(iv) the aggregate impact of all disputed items on the Adjusted EBITDA calculation and the resulting Earnout Payment.
(c) If the Seller Representative does not deliver a Notice of Objection within the Review Period, the Earnout Statement as delivered by Purchaser shall be deemed accepted by the Seller Representative and shall become final and binding on all Parties for all purposes under this Agreement. Any items in the Earnout Statement that are not specifically disputed in a timely Notice of Objection shall be deemed accepted by the Seller Representative and shall not be subject to further review or challenge.
Section 3.4 — Resolution of Objections.
(a) If a timely Notice of Objection is delivered by the Seller Representative, Purchaser and the Seller Representative shall negotiate in good faith for a period of thirty (30) days following delivery of the Notice of Objection (the "Negotiation Period") to resolve the disputed items identified in the Notice of Objection. During the Negotiation Period, each Party shall make available to the other Party such personnel and information as may be reasonably necessary to facilitate the resolution of the disputed items.
(b) If Purchaser and the Seller Representative resolve all disputed items during the Negotiation Period, the Parties shall execute a written memorandum setting forth the agreed-upon resolution, and the Earnout Statement shall be revised accordingly and shall thereupon become final and binding on all Parties for all purposes under this Agreement.
(c) If Purchaser and the Seller Representative do not resolve all disputed items during the Negotiation Period, any remaining disputed items (and only such items) shall be submitted to the dispute resolution procedures set forth in Article IV. Items that have been resolved by agreement during the Negotiation Period shall not be reopened or reconsidered.
ARTICLE IV — DISPUTE RESOLUTION
Section 4.1 — Submission to Independent Accounting Firm.
(a) Any disputed items remaining after the expiration of the Negotiation Period described in Section 3.4 shall be submitted to the Independent Accounting Firm for final and binding determination. Within five (5) business days following the selection of the Independent Accounting Firm, Purchaser and the Seller Representative shall jointly execute an engagement letter with the Independent Accounting Firm setting forth the scope of the engagement, the timeline for submission of briefs and rendering of a determination, and such other terms as may be customary for such engagements.
(b) Each Party shall submit a written brief to the Independent Accounting Firm within twenty (20) days following the date of engagement, setting forth its position on each disputed item, including the factual and accounting basis for its position and supporting calculations. Each Party shall simultaneously deliver a copy of its brief to the other Party. Each Party shall have ten (10) days following receipt of the other Party's brief to submit a written response, which response shall be limited to matters raised in the other Party's brief.
(c) The Independent Accounting Firm shall resolve only the specific disputed items submitted to it and shall not make any determination with respect to any item that is not in dispute. In resolving each disputed item, the Independent Accounting Firm shall not assign a value to any disputed item that is greater than the highest value claimed by either Party or less than the lowest value claimed by either Party with respect to such item (i.e., "baseball arbitration" parameters shall apply to each individual line item in dispute). The Independent Accounting Firm shall make its determination based solely on the written briefs and responses submitted by the Parties and the provisions of this Agreement, and shall not conduct an independent audit or investigation, except that the Independent Accounting Firm may request limited additional information from the Parties as it deems necessary to resolve the specific disputed items.
Section 4.2 — Determination by Independent Accounting Firm.
(a) The Independent Accounting Firm shall render its written determination within forty-five (45) days following the date on which both Parties' response briefs have been submitted (or, if no response briefs are submitted, within forty-five (45) days following the deadline for submission of response briefs). The determination of the Independent Accounting Firm shall include a reasonably detailed explanation of the basis for its conclusions on each disputed item.
(b) The determination of the Independent Accounting Firm shall be final and binding on all Parties and shall not be subject to appeal, review, or challenge in any court or other tribunal, except in the case of manifest clerical error or fraud by the Independent Accounting Firm.
(c) The Earnout Statement shall be revised to reflect the Independent Accounting Firm's determination of the disputed items, and the Earnout Statement as so revised shall thereupon become final and binding on all Parties for all purposes under this Agreement. Purchaser shall make the applicable Earnout Payment, if any, within fifteen (15) business days following the date on which the Earnout Statement becomes final and binding in accordance with Section 2.4.
Section 4.3 — Costs of Independent Accounting Firm.
The fees and expenses of the Independent Accounting Firm shall be allocated between the Parties as follows:
(a) Such fees and expenses shall be borne entirely by the Party whose aggregate positions on all disputed items (as set forth in such Party's initial brief to the Independent Accounting Firm) are further from the Independent Accounting Firm's final determination, as measured by the aggregate dollar difference between such Party's positions and the final determination.
(b) Notwithstanding the foregoing, if the final determination of the Independent Accounting Firm falls at the exact midpoint between the aggregate positions of the Parties, or if the difference between the final determination and the closer Party's aggregate positions is less than ten percent (10%) of the total dollar amount in dispute (measured as the absolute difference between the aggregate positions of the two Parties), the fees and expenses of the Independent Accounting Firm shall be borne equally by Purchaser, on the one hand, and the Seller Shareholders (through the Seller Representative), on the other hand.
Section 4.4 — Exclusive Remedy for Earnout Calculation Disputes.
The dispute resolution procedures set forth in this Article IV shall constitute the sole and exclusive remedy of the Parties for any dispute, claim, or controversy relating to the calculation of Adjusted EBITDA, the preparation or contents of any Earnout Statement, or the amount of any Earnout Payment; provided, however, that nothing in this Section 4.4 shall limit or restrict any Party's right to pursue claims for fraud, willful breach, or specific performance under Article VII of this Agreement or to seek injunctive or other equitable relief in connection with a breach of the covenants set forth in Article V or Article VI.
ARTICLE V — CONDUCT OF THE ACQUIRED BUSINESS DURING THE EARNOUT PERIODS
Section 5.1 — Covenant to Operate in Good Faith.
(a) Purchaser covenants and agrees that during each Earnout Period it shall operate the Acquired Business in good faith and in the ordinary course of business, consistent with past practice, and shall not take any action, or fail to take any action, with the primary purpose of reducing, avoiding, or delaying any Earnout Payment or frustrating the ability of the Seller Shareholders to receive any Earnout Payment to which they would otherwise be entitled.
(b) Without limiting the generality of the foregoing, Purchaser shall use commercially reasonable efforts during each Earnout Period to:
(i) maintain the operations of the Acquired Business at a level consistent with historical practices, including the continued operation of all thirty-seven (37) outpatient rehabilitation and behavioral health facilities;
(ii) preserve the relationships of the Acquired Business with its major payors, including SummitCare Health Plans, Inc. (which represents approximately twenty-two percent (22%) of net revenue of the Acquired Business) and the Medicare and Medicaid programs (which represent approximately thirty-one percent (31%) of net revenue of the Acquired Business on a combined basis), as well as other commercial and government payors;
(iii) retain and maintain the employment of key personnel of the Acquired Business, including the approximately two thousand one hundred (2,100) clinicians, therapists, counselors, and support staff employed by the Acquired Business as of the Closing Date;
(iv) maintain the lease agreements and occupancy arrangements for the facilities of the Acquired Business, including timely payment of rent and compliance with lease terms; and
(v) maintain the clinical programs, service lines, and patient referral relationships of the Acquired Business at levels consistent with past practice.
(c) The obligations of Purchaser under this Section 5.1 are subject to the Permitted Actions described in Section 5.2 and shall be interpreted in a manner that acknowledges Purchaser's right, as owner of the Acquired Business, to exercise reasonable business judgment in managing the operations and affairs of the Acquired Business.
Section 5.2 — Permitted Actions.
Nothing in this Agreement shall prevent Purchaser from taking any of the following actions during any Earnout Period:
(a) operating the Acquired Business in accordance with Purchaser's reasonable business judgment, including making changes to pricing, reimbursement rates, staffing levels, service mix, clinical protocols, geographic footprint, facility configuration, marketing strategies, or payor relationships that Purchaser in good faith believes are in the best interest of the Acquired Business, taking into account both short-term and long-term considerations;
(b) incurring ordinary-course capital expenditures for the maintenance, upgrade, or expansion of the facilities, equipment, and technology systems of the Acquired Business;
(c) taking any action that is required by applicable federal, state, or local law, regulation, or order, including healthcare regulatory requirements imposed by the Centers for Medicare & Medicaid Services, the Tennessee Department of Health, or any other applicable governmental authority;
(d) implementing integration activities with the broader operations of Purchaser or its affiliates, including the consolidation of administrative functions (such as billing, human resources, information technology, and procurement), the implementation of shared services arrangements, or the adoption of Purchaser's policies and procedures; provided that such activities are not undertaken with the primary purpose of reducing or avoiding Earnout Payments; and
(e) responding to competitive developments, changes in market conditions, changes in reimbursement rates, public health emergencies, or other external factors affecting the healthcare industry, in each case in a manner consistent with Purchaser's reasonable business judgment.
Section 5.3 — Prohibition on Certain Actions.
Without the prior written consent of the Seller Representative (such consent not to be unreasonably withheld, conditioned, or delayed), during the Earnout Periods Purchaser shall not take any of the following actions:
(a) Merger or Consolidation. Merge, consolidate, or combine the Acquired Business with any other business, division, or operating unit of Purchaser or its affiliates in a manner that makes the separate financial reporting of the Acquired Business on a standalone basis impossible or commercially impracticable, thereby preventing the calculation of Adjusted EBITDA in accordance with this Agreement.
(b) Disposition of Assets. Sell, transfer, lease, license, or otherwise dispose of all or substantially all of the assets of the Acquired Business, except in connection with a Change of Control, which shall be subject to the provisions of Article VI.
(c) Accounting Changes. Change the accounting policies, practices, methods, or procedures of the Acquired Business (including revenue recognition policies, expense classification methodologies, or depreciation methods) in a manner that would materially reduce the reported Adjusted EBITDA of the Acquired Business, except to the extent such changes are required by changes in GAAP or applicable law promulgated after the Closing Date. In the event that any such required change would materially affect the calculation of Adjusted EBITDA, the Parties shall negotiate in good faith to adjust the Adjusted EBITDA calculation to neutralize the impact of such required change.
(d) Corporate Overhead and Intercompany Charges. Allocate, charge, or otherwise impose upon the Acquired Business any corporate overhead, management fees, monitoring fees, advisory fees, intercompany charges, shared services fees, or similar costs that are (I) not consistent with the historical overhead structure and cost allocation practices of the Acquired Business as of the Closing Date, or (II) not otherwise excluded from the Adjusted EBITDA calculation pursuant to the definition of Adjusted EBITDA in Article I. For the avoidance of doubt, any management fees or monitoring fees charged by Ardent Capital Management LLC or its affiliates shall be added back in the Adjusted EBITDA calculation as provided in clause (c) of the Adjusted EBITDA definition.
Section 5.4 — Reporting and Information Rights.
(a) Purchaser shall provide to the Seller Representative, within thirty (30) days after the end of each fiscal quarter occurring during an Earnout Period, unaudited quarterly financial statements for the Acquired Business, consisting of:
(i) an income statement for the Acquired Business for the fiscal quarter then ended and for the year-to-date period; and
(ii) a balance sheet of the Acquired Business as of the end of such fiscal quarter;
together with a preliminary calculation of year-to-date Adjusted EBITDA for the applicable Earnout Period, based on the Adjusted EBITDA definition set forth in Article I.
(b) Such quarterly financial statements and preliminary Adjusted EBITDA calculations are provided for informational purposes only and shall not constitute an Earnout Statement or be binding on any Party for any purpose under this Agreement. The provision of such quarterly information shall not limit Purchaser's rights to make adjustments, corrections, or reclassifications in the preparation of the final Earnout Statement for the applicable Earnout Period, nor shall it create any estoppel or waiver with respect to any matter reflected or not reflected therein.
(c) The Seller Representative shall have the right to request, and Purchaser shall promptly provide, reasonable clarification of any item in such quarterly reports, but the Seller Representative shall not have the right to conduct a detailed audit or review of such quarterly information prior to the delivery of the applicable Earnout Statement.
ARTICLE VI — CHANGE OF CONTROL ACCELERATION
Section 6.1 — Change of Control of Purchaser or the Acquired Business.
(a) If a Change of Control of Purchaser or the Acquired Business (as defined in Article I) occurs prior to the end of any Earnout Period for which the applicable Earnout Payment has not yet been finally determined and paid in accordance with Articles II through IV, then, upon the closing of such Change of Control, one hundred percent (100%) of the maximum remaining earnout consideration that has not yet been paid shall become immediately due and payable to the Seller Shareholders, without regard to whether any Adjusted EBITDA threshold or target would have been achieved during the applicable Earnout Period.
(b) Without limiting the generality of Section 6.1(a), the following rules shall apply:
(i) If a Change of Control occurs during or prior to the end of Earnout Period 1 (i.e., on or before June 30, 2025) and no Tranche 1 Earnout has been paid, both the full Tranche 1 Earnout of Twenty-Two Million Five Hundred Thousand Dollars ($22,500,000) and the full Tranche 2 Earnout of Twenty-Two Million Five Hundred Thousand Dollars ($22,500,000), for an aggregate amount of Forty-Five Million Dollars ($45,000,000), shall become immediately due and payable to the Seller Shareholders at the closing of the Change of Control.
(ii) If a Change of Control occurs after payment of the Tranche 1 Earnout (whether at the maximum amount or at a lesser amount determined in accordance with Section 2.1(a)) but during or prior to the end of Earnout Period 2 (i.e., on or before June 30, 2026) and no Tranche 2 Earnout has been paid, the full Tranche 2 Earnout of Twenty-Two Million Five Hundred Thousand Dollars ($22,500,000) shall become immediately due and payable to the Seller Shareholders at the closing of the Change of Control.
(iii) Any amounts previously paid as Tranche 1 Earnout or Tranche 2 Earnout pursuant to Article II shall be credited against the maximum earnout amounts for purposes of calculating the accelerated earnout payable under this Section 6.1. By way of illustration, if the Tranche 1 Earnout was paid in an amount of $9,000,000 and a Change of Control occurs during Earnout Period 2, the accelerated amount payable under this Section shall be $22,500,000 (representing the full Tranche 2 Earnout), and the aggregate of all Earnout Payments would be $31,500,000.
Section 6.2 — Payment Mechanics on Change of Control.
(a) Payment of any accelerated earnout amount pursuant to Section 6.1 shall be made simultaneously with, or within five (5) business days following, the closing of the Change of Control transaction, by wire transfer of immediately available funds to the accounts designated by the Seller Representative in accordance with the wire instructions set forth in Exhibit C (or such updated wire instructions as may be provided by the Seller Representative at least five (5) business days prior to the closing of the Change of Control).
(b) Purchaser shall provide the Seller Representative with at least fifteen (15) days' prior written notice of any anticipated or proposed Change of Control, which notice shall include:
(i) a description of the proposed Change of Control transaction, including the form and structure thereof;
(ii) the expected closing date of the proposed Change of Control;
(iii) the identity of the proposed acquiror, successor, or counterparty; and
(iv) the calculation of the accelerated earnout amount payable to the Seller Shareholders in connection with such Change of Control.
(c) In connection with any Change of Control transaction, Purchaser shall use its reasonable best efforts to cause any acquiror, successor, or surviving entity to expressly assume Purchaser's obligations under this Agreement (including, without limitation, the obligation to pay the accelerated earnout) as a condition to the closing of such Change of Control; provided, however, that the obligation to pay the accelerated earnout under this Article VI shall remain a primary and unconditional obligation of Purchaser regardless of whether such assumption is obtained. Purchaser shall not close any Change of Control transaction unless adequate provision has been made (by escrow, assumption, guarantee, or otherwise) for the payment of the accelerated earnout amounts due under this Section.
Section 6.3 — No Duplication.
For the avoidance of doubt, the aggregate Earnout Payments made under this Agreement, whether paid in the ordinary course pursuant to Article II or accelerated pursuant to this Article VI, shall not under any circumstances exceed the Earnout Cap of Forty-Five Million Dollars ($45,000,000). No Seller Shareholder shall receive more than its pro rata share of the Earnout Cap as set forth in Section 2.3, and no payment under this Article VI shall result in duplication of any Earnout Payment previously made under Article II.
ARTICLE VII — REMEDIES
Section 7.1 — Specific Performance.
The Parties acknowledge and agree that a breach or threatened breach of the covenants contained in Article V (Conduct of the Acquired Business During the Earnout Periods) or Article VI (Change of Control Acceleration) would cause irreparable harm to the Seller Shareholders for which monetary damages alone would not be an adequate remedy. Accordingly, in the event of any such breach or threatened breach, the Seller Shareholders (acting through the Seller Representative) shall be entitled to seek an injunction, specific performance, and any other equitable relief from any court of competent jurisdiction, in addition to (and not in lieu of) any other rights and remedies available to the Seller Shareholders at law or in equity. Neither Purchaser nor any other Party shall be required to post a bond or other security as a condition to obtaining equitable relief under this Section 7.1, and no Party shall assert the defense of adequacy of monetary damages in any action or proceeding seeking equitable relief under this Section.
Section 7.2 — Fraud and Willful Breach.
Notwithstanding anything to the contrary in this Agreement, including the exclusive remedy provisions of Section 4.4, nothing in this Agreement shall limit, waive, or restrict any Party's rights, remedies, or claims (whether at law, in equity, or otherwise) in the event of actual fraud, intentional misrepresentation, or willful and material breach by any other Party of any representation, warranty, covenant, or obligation under this Agreement. The limitations on remedies and the dispute resolution procedures set forth in this Agreement are not intended to, and shall not, protect any Party against liability for fraud, intentional misrepresentation, or willful and material breach.
Section 7.3 — Relationship to APA Indemnification.
(a) This Agreement is separate from, and in addition to, the indemnification provisions set forth in Article IX of the APA, including the indemnification cap of One Hundred Twenty-Four Million Dollars ($124,000,000) (representing twenty percent (20%) of the base purchase price), the indemnification basket (deductible threshold) of Three Million One Hundred Thousand Dollars ($3,100,000) (representing one-half of one percent (0.5%) of the base purchase price), and the de minimis threshold of One Hundred Thousand Dollars ($100,000) per individual indemnification claim.
(b) Nothing in this Agreement shall limit, reduce, or otherwise affect any Party's indemnification rights, obligations, or remedies under the APA, and nothing in the APA shall limit, reduce, or otherwise affect any Party's rights, obligations, or remedies under this Agreement, except as expressly provided in Section 2.5 (Right of Setoff) of this Agreement. The indemnification provisions of the APA and the earnout provisions of this Agreement are independent obligations, and the satisfaction of, or failure to satisfy, obligations under one shall not affect the other, except as expressly stated herein.
ARTICLE VIII — GENERAL PROVISIONS
Section 8.1 — Notices.